FNMA and FMCC preferreds. In search of the elusive 10 bagger.

[merkhet]

@merk

 

re 4263..."(b) Scope of review

The Court may modify, terminate, or set aside an action taken by the Director and reviewed by the Court pursuant to this section only if the court finds, on the record on which the Director acted, that the action of the Director was arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with applicable laws."

 

wonder why this line of argument is being pursued if it was not in record and noticed in appeal. but anyway, where is the record of fhfa to support determination that gses dont need capital?  sounds like another litigation-based argument by govt.  also, how is this notion that gses dont need capital jive with applicable law, conservatorship duty to rehabilitate and conserve

 

I think there are two responses to this -- (1) well, you didn't give us a record nor are you able to provide one post hoc, and (2) how many legs does a dog have if you call its tail a leg? four. calling a tail a leg does not make it so -- ergo, suspending the capital requirements is NOT the same as making a determination as to whether the companies are safe and sound

 

Have you seen the show "Lie to me"?

OMG we need an expert like that to truly read the minds of Millet and Brown.  :D

 

Yes, actually, I have read four books by Paul Ekman, the person on whom that show is based. They're quite good, and I would highly recommend the one he co-wrote with the Dalai Lama.

 

thanks for all of this merk!  you are doing a great job. i will post after i free up to listen to audio a couple of times.

 

it occurs to me that this case is so difficult for judges because it combines both administrative law and corporate law.  dc circuit ct of appeals judges are more attuned to the former, but it seems by your posts that at least ginsburg has a feel for the economics as well

 

I had a similar thought today that this is why we have bankruptcy courts. You need judges with experience understanding finance for cases similar to this, but I think the judges will arrive at the correct judgment here -- seems like the easiest method for the judges to rule, upon my second run through of the oral arguments, is to grant some relief through the breach of K claims, which are direct and don't at all impact any additional discovery, etc. (Also, seemingly not barred by either 4617(f) or 4623 but maybe I'm missing something there.)

 

And on that note, it's past midnight, so I'm turning in!

[Guest cherzeca]

outstanding merkhet!  tell your fiancee i said not to throw this one back in the pond.

 

after having heard the arguments live, then having read and thought about this assiduously, acknowledging your bias as you do, do you now still agree with yourself after the argument that this is winner winner...

[merkhet]

outstanding merkhet!  tell your fiancee i said not to throw this one back in the pond.

 

after having heard the arguments live, then having read and thought about this assiduously, acknowledging your bias as you do, do you now still agree with yourself after the argument that this is winner winner...

 

Haha. How did you know that reviewing my notes and thinking through my analysis was the first thing I was doing this morning? Yes, I still agree with my initial assessment of winner winner chicken dinner.

 

I think the breach of K claim is still the easiest for the judges to resolve as there seems to be no real disagreement that the claims are direct and not barred by either of the statutory limitations of 4617(f) or 4623. Moreover, my read of the judges is that Ginsburg very seriously believes the appellants' claim that the Treasury & Administration made a decision in 2011 to kill the companies, and if they did that, they should have announced that they were being a receiver. Since they didn't do that, Ginsburg, IMO, believes they are trying to do an end run around the statutory protections granted to shareholders during a receivership -- ergo, breach of K.

 

The other route, of course, is to declare a violation of the APA. Now, this has become slightly trickier because the purpose of the 4623 discussion is to decide on what grounds the appellants can prove that the company is not being run in a safe & sound or rehabilitated manner. If the conservator can decide by fiat the capital classification of the company, then it's possible that there's no way to make a determination on the soundness of the company that differs from that. (Caveats being that they'd have to produce a record, etc.) Mainly, I think Ginsburg pressed them on whether it was a discretionary supervisory action because it would further any request for a complete administrative record -- as there is currently nothing in the record supporting the idea that FHFA made a discretionary supervisory decision to substitute real capital for Treasury's letter of credit. Moreover, I'm not sure that running a company completely on debt (w/ no equity) isn't on its face absurd -- particularly a financial company, but that is maybe a little too complicated a leap to make for three judges that have no finance background.

 

The other part, of course, is Ginsburg's declaratory statement that he sees the conservator and receiver distinction as being much more separate than the government does. If, as I believe, his view of the fact pattern is that the government decided to be a receiver and call itself a conservator, then I think there are clear grounds for Ginsburg to make a determination that the government has made a grave error in overstepping its bounds as a conservator. This dovetails nicely with Millett's repeated questions to Olson earlier re "well, is the only issue here that they failed to give you notice that they were being a receiver?" (Perhaps this was something the judges discussed amongst themselves prior to oral arguments.) Moreover, Olson, bless his heart, by dint of his friendship with Judge Ginsburg almost certainly picked up on Ginsburg's leaning during the Stern discussion and that's why he came at the idea of a shell game during his rebuttal. Very, very clever, as I think Olson knows which buttons to push for Ginsburg.

 

Anyway, tl;dr, winner winner chicken dinner. At the very least, I think we get a remand for a complete administrative record. Base case, I think we win on breach of K. Bull case, I think we win on APA.

[doughishere]

APA. Now, this has become slightly trickier because the purpose of the 4623 discussion is to decide on what groun

 

 

Hasn't there been chatter from like Watt on that?

[merkhet]

APA. Now, this has become slightly trickier because the purpose of the 4623 discussion is to decide on what groun

 

 

Hasn't there been chatter from like Watt on that?

 

Yes, though it's unclear whether you can enter Watt's recent comments into this portion of the proceedings.

[Mephistopheles]

 

Anyway, tl;dr, winner winner chicken dinner. At the very least, I think we get a remand for a complete administrative record. Base case, I think we win on breach of K. Bull case, I think we win on APA.

 

From what I gather, you mean base case is a win for the prefs, and bull case is win for prefs+commons?

[merkhet]

 

Anyway, tl;dr, winner winner chicken dinner. At the very least, I think we get a remand for a complete administrative record. Base case, I think we win on breach of K. Bull case, I think we win on APA.

 

From what I gather, you mean base case is a win for the prefs, and bull case is win for prefs+commons?

 

It's not that cut and dry, but that's the gist of it. A breach of K claim, IMO, is easier to find in the junior preferreds than in the common. I know what my liquidation amount is on my junior preferred: par. What's the liquidation amount on the common? ¯\_(ツ)_/¯

[Guest cherzeca]

just from reading your notes, merk, it sounds to me like olson's base case was vacate and remand for supplementing admin record. reversal would be a reasonable objective given incompatibility of NWS with what a conservator normally is supposed to do (millett), and assuming that the only necessary additional get beyond brown was ginsburg...who is a stickler for statutory meaning, and not just text like lamberth

[merkhet]

just from reading your notes, merk, it sounds to me like olson's base case was vacate and remand for supplementing admin record. reversal would be a reasonable objective given incompatibility of NWS with what a conservator normally is supposed to do (millett), and assuming that the only necessary additional get beyond brown was ginsburg...who is a stickler for statutory meaning, and not just text like lamberth

 

I think he realizes that supplementation of the administrative record is the easiest thing to get, but we'll see if the shell game argument has any resonance. The more I think about the rebuttal, the more impressed I am with how he did.

[merkhet]

I shot Olson a note just now with some thoughts on 4623. He's an old friend of a professor of mine from law school, and we met years ago. We'll see if Olson responds. :)

[Guest cherzeca]

I shot Olson a note just now with some thoughts on 4623. He's an old friend of a professor of mine from law school, and we met years ago. We'll see if Olson responds. :)

 

i bet he doesnt respond, but that does not mean he doesnt pass it on internally

[merkhet]

I shot Olson a note just now with some thoughts on 4623. He's an old friend of a professor of mine from law school, and we met years ago. We'll see if Olson responds. :)

 

i bet he doesnt respond, but that does not mean he doesnt pass it on internally

 

Who knows. Took me five minutes to put my notes together, so it's a small cost on my part. Plus, Judge Steele responds, so I figured why not? :)

 

To the other people reading this, please do not also send Olson a note. Hypocritical, I know, but I would rather he not get a deluge of emails given that they've only got 7 days until they have to file their supplemental brief.

[SnarkyPuppy]

What is everyone's common/preferred allocation?  I own 3x as much common as I own preferred but thinking about re-allocating more towards the preferreds as a sort of hedge 

[merkhet]

What is everyone's common/preferred allocation?  I own 3x as much common as I own preferred but thinking about re-allocating more towards the preferreds as a sort of hedge

 

I have no allocation to common. 100% of my allocation is in the Fannie Mae preferreds.

[SnarkyPuppy]

What is everyone's common/preferred allocation?  I own 3x as much common as I own preferred but thinking about re-allocating more towards the preferreds as a sort of hedge

 

I have no allocation to common. 100% of my allocation is in the Fannie Mae preferreds.

 

Definitely appreciate your perspective - the legal aspect of this is very much over my head and therefore I only hold a small position.  Assuming your rationale for preferreds is to limit downside exposure - i.e., it seems in most scenarios (excluding the status quo) the preferreds would likely be liquidated?

[Luke 532]

What is everyone's common/preferred allocation?  I own 3x as much common as I own preferred but thinking about re-allocating more towards the preferreds as a sort of hedge

 

100% pref, 0% common.  Based on current dollar value...

FNMAS: 47%

FNMAH: 38%

FMCCL: 15%

Common: None

[merkhet]

Definitely appreciate your perspective - the legal aspect of this is very much over my head and therefore I only hold a small position.  Assuming your rationale for preferreds is to limit downside exposure - i.e., it seems in most scenarios (excluding the status quo) the preferreds would likely be liquidated?

 

Not necessarily. It's certainly easier to establish valuation in a liquidation scenario given that the junior preferreds have a par amount that means something. However, there is also some concern on my part that any settlement that involved converting the junior preferred over to common stock would involve significant dilution -- but yes, primarily it's downside protection.

[Eye4Valu]

Is it correct to say that there is no breach of contract claim with respect to the common, only a takings claim. But with the preferred, you have both?

[Mephistopheles]

What is everyone's common/preferred allocation?  I own 3x as much common as I own preferred but thinking about re-allocating more towards the preferreds as a sort of hedge

 

I have no allocation to common. 100% of my allocation is in the Fannie Mae preferreds.

 

You said this is because Delaware law is more established as opposed to Virginia law right? Is it also because McFarland was Fannie CFO not Freddie?

 

I know DE and VA law is different but how do you assess one is more favorable than the other ? Wouldn't it be safer to do 50/50 in each?

[doughishere]

What is everyone's common/preferred allocation?  I own 3x as much common as I own preferred but thinking about re-allocating more towards the preferreds as a sort of hedge

 

Cuz why not...

 

I'm about 80/20 preff/common

 

About a 7% position of my overall portfolio....for all of it. Don't let me manage other people's money. I probably won't take it any ways.

 

 

[Guest cherzeca]

Is it correct to say that there is no breach of contract claim with respect to the common, only a takings claim. But with the preferred, you have both?

 

breach of K for pref, breach of fid duty for common

[Guest cherzeca]

@merkhet

 

even in a "base" case of remand for admin record, wouldnt merits panel necessarily have to find anti-injunction no bar to judicial review as a condition to reach that result?  this would have important value in other cases like hindes/jacobs. also a finding of non-displacement of GSE shareholders would be important as well, and it seems that would also be a condition to reaching any result other than affirmance

[merkhet]

You said this is because Delaware law is more established as opposed to Virginia law right? Is it also because McFarland was Fannie CFO not Freddie?

 

I know DE and VA law is different but how do you assess one is more favorable than the other ? Wouldn't it be safer to do 50/50 in each?

 

Delaware law is more established than Virginia law re various corporate rights. Assessing that is just a function of knowing general corporate law. I don't really know how to get more granular than that. It's not like I did a review of hundreds of years of case law in both states or anything. Although, my guess is that it'd be easier to do that for VA law because the VA case law is likely pretty light.

 

@merkhet

 

even in a "base" case of remand for admin record, wouldnt merits panel necessarily have to find anti-injunction no bar to judicial review as a condition to reach that result?  this would have important value in other cases like hindes/jacobs. also a finding of non-displacement of GSE shareholders would be important as well, and it seems that would also be a condition to reaching any result other than affirmance

 

I don't think so, but Millett was asking about that during Olson's time. Chicken & egg problem. Of course, assuming that you can't ask for the full administrative record because of 4617(f) would swallow the idea that there was anything that wasn't within the purview of HERA because... well, how would you enforce it?

[Mephistopheles]

You said this is because Delaware law is more established as opposed to Virginia law right? Is it also because McFarland was Fannie CFO not Freddie?

 

I know DE and VA law is different but how do you assess one is more favorable than the other ? Wouldn't it be safer to do 50/50 in each?

 

Delaware law is more established than Virginia law re various corporate rights. Assessing that is just a function of knowing general corporate law. I don't really know how to get more granular than that. It's not like I did a review of hundreds of years of case law in both states or anything. Although, my guess is that it'd be easier to do that for VA law because the VA case law is likely pretty light.

 

That's true that DE is more established but I was just concerned about a (very unlikely) scenario in which a judge in Virginia rules in favor of us and one in Delaware for the govt.

 

Like if we get a Lamberth type character in DE and Gingsburg/Brown type in VA.

 

[Guest cherzeca]

You said this is because Delaware law is more established as opposed to Virginia law right? Is it also because McFarland was Fannie CFO not Freddie?

 

I know DE and VA law is different but how do you assess one is more favorable than the other ? Wouldn't it be safer to do 50/50 in each?

 

Delaware law is more established than Virginia law re various corporate rights. Assessing that is just a function of knowing general corporate law. I don't really know how to get more granular than that. It's not like I did a review of hundreds of years of case law in both states or anything. Although, my guess is that it'd be easier to do that for VA law because the VA case law is likely pretty light.

 

@merkhet

 

even in a "base" case of remand for admin record, wouldnt merits panel necessarily have to find anti-injunction no bar to judicial review as a condition to reach that result?  this would have important value in other cases like hindes/jacobs. also a finding of non-displacement of GSE shareholders would be important as well, and it seems that would also be a condition to reaching any result other than affirmance

 

I don't think so, but Millett was asking about that during Olson's time. Chicken & egg problem. Of course, assuming that you can't ask for the full administrative record because of 4617(f) would swallow the idea that there was anything that wasn't within the purview of HERA because... well, how would you enforce it?

 

i understood that to be lamberth's point.  admin record unnecessary because 4617(f) means no judicial review (if you find a power).  so fhfa came forth and presented a power that it exercised (managing business/entering into Ks).  end of review.  no need to begin review by analyzing admin record.  now maybe millett sees it differently.  if she thinks fhfa can be a receiver and just not give notice, then she might see many things differently.